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Can Exchange Rates Forecast Commodity Prices?

Author

Listed:
  • Chen, Yu-chin
  • Rogoff, Kenneth
  • Rossi, Barbara
Abstract
This paper studies the dynamic relationship between exchange rate fluctuations and world commodity price movements. Taking into account parameter instability, we demonstrate surprisingly robust evidence that exchange rates predict world commodity price movements, both in-sample and out-of-sample. Because commodity prices are exogenous to the exchange rates we consider, we are able to overcome the identification problems that plague the existing empirical exchange rate literature. Because our finding that exchange rates predict future commodity prices can be given a true causal interpretation, it provides the most concrete support yet for the importance of selected macroeconomic fundamentals in determining exchange rates. As an important by-product of our analysis, we show that exchange rate-based forecasts may be a viable alternative for predicting future commodity price movements.

Suggested Citation

  • Chen, Yu-chin & Rogoff, Kenneth & Rossi, Barbara, 2008. "Can Exchange Rates Forecast Commodity Prices?," Working Papers 08-03, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:08-03
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    More about this item

    Keywords

    Exchange rates; forecasting; commodity prices; random walk;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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